The envelope budgeting technique is a straightforward, methodical approach to conserving money and paying debts. The strategy allows you to set aside what you need for expenses while still sticking to your own budget. It is a common budgeting approach that may also be used with personal financial applications.
Envelope Budgeting Explained
The envelope budgeting method splits your money into multiple spending areas, such as bills, food, and petrol. Once you’ve established how much you want to spend in each area, take that amount in cash and put it in an envelope.
Then, only spend what’s left in that envelope on bills or purchases in that category.
The goal is to keep you from overspending by restricting your spending options.
Even if you no longer pay bills in cash, the idea remains valid and may be implemented using software or other financial technologies.
The advantage of envelope budgeting is that it encourages you to keep track of your spending habits since once the envelope is empty, you can’t spend from that area until your next paycheck replaces it.
Step 1: Define Categories and Limits
To utilize envelope budgeting, first define your budget’s spending categories and then set spending limitations for each category.
Consider where your money goes to obtain a sense of what categories can be appropriate for your budget. Make a list of your common expenses so that you can categorize them properly. For instance, your categories may include:
- Grooming and health
- Going out to eat
- Items for the home
- Animal care
- Items for children
Customize your categories to your unique scenario. Make as many categories as you need, but not so many that it becomes confusing.
Don’t forget to add unexpected bills like taxes, insurance, or presents, as well as a savings area.
Check your recent financial accounts or receipts to obtain an idea of your typical spending to determine a suitable monthly limit for each area. You may use that amount or, if you’re attempting to save money, a somewhat lower value.
Step 2: Personalize Each Envelope
On one envelope for each expenditure category, write the name of the category and the monthly planned amount.
If you are paid on a weekly or biweekly basis, divide the total monthly amount for each category by the number of pay periods in each month and write that value on the envelope. This will assist you in putting the correct amount from each paycheck into the envelope.
Step 3: Create Separate Funds
Assume you get a $500 paycheck in this scenario. Cash your paycheck and place the appropriate amount in each allotted category envelope. A basic example might be partitioned as follows:
- The food budget envelope contains $100.
- The rent budget envelope contains $200.
- $70 in the envelope for petrol and vehicle maintenance
- The utility budget envelope contains $30.
- $70 in the envelope for personal care and apparel
- $30 in the budgeted savings envelope
Add the profits from each check to each cash envelope in accordance with your chosen budget.
Step 4: Spend the money from the envelopes
Take the money for the payment from the proper envelope when you go shopping or pay a bill. Carry the envelope with you if you are paying a bill in person. Similarly, if you go grocery shopping, carry your grocery envelope with you.
If you have money left over in any of your envelopes at the end of the month, you may either retain it in that envelope for the following month’s expenditures or take it and put it in savings or your emergency fund.
Budgeting in this manner may help you attain a savings goal, which in turn can help you stay on track with your budget.
Using Financial Software for Envelope Budgeting
Cash envelope budgeting may seem antiquated in this day and age, with direct deposit for paychecks, electronic money transfer, debit cards, credit cards, and checks.
However, using personal finance or budgeting software based on envelope budgeting principles, you may employ easy financial transaction techniques while still adhering to the envelope budgeting discipline.
When a bill is paid directly, the program removes the payment amount from the relevant envelope.
If you pay with a credit card, the program may save that amount in a credit card payment “envelope” or category to be utilized when you pay your credit card bill.
You Need a Budget, for example, employs virtual “envelopes” to represent budget categories and to display spending activities and balances for each.
When earnings are logged, the program allocates a part to each “envelope.” When you make a purchase, you tell the program which spending categories to utilize, and the money is deducted from the “envelopes.”
What role does the envelope method have in budgeting?
Because you can’t spend until a certain envelope is empty for the month, the conventional cash envelope budgeting approach makes it easier to keep to a budget.
If you keep to it, each spending category will have a strict limit.
Are there any disadvantages to using a cash envelope budget?
The most significant disadvantage of the cash envelope approach is that it is out of date.
People are using less cash, and carrying cash envelopes may be cumbersome or even dangerous.
If you want the advantages and structure of an envelope system but don’t want to carry cash, try utilizing an app like YNAB or Mvelopes that enables you to digitally mimic the system.